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Brazil: a country in deep recession looks tentatively towards the first steps of the new government

Brazil entered into a technical recession in the second quarter of 2015. Its economy contracted by 3.8 % in 2015.

Its economy contracted by 3.8 % in 2015, mainly driven by the free fall in investment and the collapse in consumption.

The current recession and the Carwash1 corruption scandal have impacted the first of these variables, while the second has reacted to rising unemployment, negative growth in real wages and deteriorating credit conditions.

The government has also failed to contain the dangerous course of its expenses and a second year of primary fiscal deficit was reported in 2015 - a clear sign of lack of fiscal discipline. After having already downgraded Brazil from A4 to B (see scale) in September 2015, Coface again downgraded the country in January 2016. Brazil's new C Coface assessment means that it is considered as high risk.

On May 12 2016, President Dilma Roussef was temporarily removed from office, after the Senate voted to begin an impeachment trial. The proceedings against her mandate concerned breaches of the Fiscal Responsibility Law and were particularly based on fiscal irregularities. Now that Vice President Michel Temer (PMDB party) has assumed the presidency, the Upper House will have 180 days to convene a trial to discuss the charges. Dilma will be impeached if two-thirds of the Upper House vote in favour. If this were to be the outcome, Temer will serve out the remainder of the presidential term, ending in 2018.

Confidence is expected to show signs of improvement in the short term, with the hopes that the new government brings. Nevertheless, Temer is taking office with only weak support from the population, as he was not voted for by direct election and as his party is also highly linked to the carwash corruption scandals. As the investigations are still ongoing, new scandals could erupt in the news over the coming months. He will not have much time to show improvements in terms of fiscal commitment and his ability to deal with Congress, in order to implement the measures required to support an economic rebound.

Activity will not rebound in 2016 and Coface expects a contraction of 3 % of GDP this year.The weak scenario has spilled over into the economy´s major sectors, leading to higher insolvency rates. Coface's sector barometer shows that the main segments of activity are at high risk. The scenario is even worse for the construction, automotive and steel industries, which are currently at very high risk. A reverse of this trend is not expected in the short term, as the deep recession is continuing to drag down profitability.